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What Is Estate Planning?

Life Insurance can aid in your estate planning.Estate planning is lifetime planning for the distribution of your assets at death. When you die, your assets can pass according to your intent, or by default.

Currently, if death occurs in either of the years 2002 or 2003 and the total of all your assets is more than $1,000,000 for an individual or twice that, $2,000,000, for a married couple, you will owe some estate tax to the IRS Estate Tax Collector unless you are able to implement suitable planning. If your net worth, including your house, is at that bracket or above, you may find it useful to look at our section, Using life insurance to pay estate tax.

If you are more interested in a few general estate planning principals, then read on.

Understanding a few estate planning basics

What is your estate?
For most people, your estate consists of real estate, retirement benefits, personal property - in the form of cash, furniture, your personal effects, cars, etc. - life insurance, and perhaps an interest in a business.

Common objectives 1. Controlling your assets until death, 2. Quick and confidential distribution of your estate according to your intent at death, 3. Consistent with implementation of your intent, maintenance of minimum estate administration expenses during life and after death.

Common estate distribution methods 1. By operation of Law, for example through intestate succession or joint tenancy with right of survivorship, 2. By will subject to probate, 3. By trust.

Common recipients of your estate 1. Family and friends, 2. Charity, or the 3. IRS Estate Tax Collector.

What if you die without a legally valid estate plan?
If you die without a legally valid estate plan (will/trust documents), the law of intestate succession will determine who will own your property. Your intent, even known by relatives or friends can do little to influence the court. The court must follow the intestate succession laws of your legal jurisdiction.

What is probate?
Probate is a legal process involving lawyers and court by which an estate is settled on behalf of a deceased person. It includes court validation a deceased person's estate related documents, and things like paying debts, taxes, fees, and distributing property as directed in a will. Most states do not require a probate proceeding for estates less than a certain sum.

What is a will?
A will is a document subject to state law that delineates how your assets are to be distributed at death. It can designate things like a guardian for minor children, which assets should pay debts, taxes, fees, and of course, name particular beneficiaries of the estate. It can also create a trust.

What is a trust?
Life Insurance protects the ones you love.A trust is a document subject to state law that creates an arrangement by which you as a trustor or grantor place property in trust for the benefit of a beneficiary(ies). You name a trustee to manage the trust assets, known as the trust res.

A revocable trust is one for which you can change the trust terms or even cancel the trust during your life. If you do not do so the terms become irrevocable at your death. One type of revocable trust is often referred to as a living trust.

Irrevocable trusts usurp your ownership and control over trust assets. A common reason for using an irrevocable trust is to remove from your estate the assets transferred to the irrevocable trust. One purpose of such a transfer is to reduce taxes owed at death.

What is conservatorship?
A conservatorship or guardianship proceeding, sometimes known as a living probate, occurs when someone becomes mentally incompetent. Then a probate court appoints someone to manage a disabled person's personal and business affairs. Conservatorship can be expensive, lengthy, and uncomfortable for family members.

Conservatorship and wills and trusts
Since a will has no power until death, a will cannot avoid a conseratorship proceeding. However, a well drafted revocable living trust can avoid conservatorship. In a trust you state your intent in advance with regard to mental or physical incapacity. As trustee you select the person to carry out your intent so that a conservatorship proceeding is unnecessary.

Common ways property is owned.
Separate Property - property owned by one spouse, to the others exclusion, in a community property state. Community Property - marital property owned by both spouses in community property states. Joint tenancy with right of survivorship - often known merely as joint tenancy. What is it and why do so many people use it? It is a form of ownership where two or more persons, married or not, both own property jointly. Unlike other forms of joint ownership, tenancy in common for example, the surviving owner(s) acquires a deceased owner's interest at death.

Because a joint tenant's interest passes to the surviving joint tenants by operation of law, immediately at death, property in joint tenancy is not controlled by a joint tenant's will.

Does Joint Tenancy avoid Probate?
Yes, it avoids probate upon the death of the first of two or more joint tenants to die. When the second or last person dies the asset becomes subject to probate unless the asset was sold, gifted from the estate, or transferred to a trust prior to death.

Does Joint Tenancy avoid a conservatorship?
It cannot.

Joint tenancy and income tax problems in community property states
Although ownership by joint tenancy is common it has a significant tax disadvantage for married couples in a community property state like California. The problem occurs when a married couple takes title in joint tenancy, and where one spouse subsequently dies and then the survivor sells the asset for a gain.

Life Insurance can provide for your spouse.Say Dick and Jane, husband and wife, bought a $250,000 home, taking title in joint tenancy, 50% each. For income tax purposes each received a basis of $125,000.

If Dick dies and then Jane sells the home for $500,000, Jane's income tax basis is $375,000. At Dick's death his one-half, $125,000, interest received a step up in tax basis to $250,000. However, Jane's one half interest remains at $125,000 for a total basis of $375,000.

When Jane sold the house for $500,000, she created a taxable gain of $125,000 (the $500,000 selling price minus her recently adjusted $375,000 basis). Assuming the house was held long-term for tax purposes, the tax owed was $25,000.

However, if Dick and Jane owned the home as community property, Jane would have avoided paying $25,000 in long-term capital gains tax. With community property, a surviving spouse receives a step up in basis on the half she owns as well as on the half she receives from her deceased spouse. Had the house been owned as community property, the adjusted basis would have been $500,000.

A house with a $500,000 income tax basis that is sold for $500,000 triggers no taxable gain. No gain means no tax.

Taking title to an asset in joint tenancy can create other unintended consequences as well. If you have questions about estate planning you should consult a qualified estate planning attorney.

Using life insurance to pay estate tax
The impact of the estate tax is predictable. Three categories of asset liquidity exist:those that are liquid, those that are relatively liquid, and those that are not liquid. The IRS Estate Tax Collector wants liquid assets to satisfy any tax which is owed. That means cash. This legal tender must be paid within nine months of death. Your family gets what remains.

The Federal Unified Estate and Gift Tax
Federal estate tax is really a Federal Unified Estate and Gift Tax. It is one tax applied to large gifts during life and large estates at death. It's purpose is to tax asset transfers similarly whether made during life or at death.

The unified transfer tax rate schedule for estate and gift taxes is progressive (more tax owed on larger taxable estate values). Tax is first figured on the cumulative taxable transfers made during life (lifetime gifts) which exceeded the annual gift tax exclusion (generally $10,000 per beneficiary) in the year made. Then that cumulative figure is added to the tax owed on all taxable transfers at death.

Unlimited Marital Deduction
The Economic Recovery Tax Act of 1981 provided for an Unlimited Marital Deduction, and a larger Unified Credit. The Unlimited Marital Deduction enables a spouse to pass his or her entire estate to the other spouse free of any gift or estate tax. However, exercising the Unlimited Marital Deduction, though a boon to a surviving spouse, extinguishes, unused, a deceased spouses' Unified Credit.

Unified Credit
The Unified Credit is a dollar for dollar credit against the Federal Unified Estate and Gift Tax.

Exemption Equivalent
The dollar amount of taxable estate assets which will use up an individual's unified credit is known as the exemption equivalent. In other words, the exemption equivalent is the size of estate you can leave without paying federal estate and gift tax.

After exhausting an individual's unified credit the Federal Unified Transfer Tax Rate Schedule for taxable estates and lifetime gifts begins at 37% for an estate size of $675,000 in years 2000 and 2001:

The amount of tax which the unified credit offsets

Amount to be taxed

The tentative tax is

>$0 < $10,000

18% of such amount

>$10,000 < $20,000

$1,800, plus 20% of excess over $10,000

>$20,000 < $40,000

$3,800, plus 22% of excess over $20,000

>$40,000 < $60,000

$8,200, plus 24% of excess over $40,000

>$60,000 < $80,000

$13,000, plus 26% of excess over $60,000

>$80,000 < $100,000

$18,200, plus 28% of excess over $80,000

>$100,000 < $150,000

$23,800, plus 30% of excess over $100,000

>$150,000 < $250,000

$38,800, plus 32% of excess over $150,000

>$250,000 < $500,000

$70,800, plus 34% of excess over $250,000

An individual's unified credit is extinguished within the first bracket below. It is in that bracket that $675,000 in assets, the exemption equivalent (double for a married couple), and the unified credit, $220,550, fall.

>$500,000 < $750,000

$155,800, plus 37% of excess over $500,000

>$750,000 < $1,000,000

$248,300, plus 39% of excess over $750,000

>$1,000,000 < $1,250,000

$345,800, plus 41% of excess over $1,000,000

>$1,250,000 < $1,500,000

$448,300, plus 43% of excess over $1,250,000

>$1,500,000 < $2,000,000

$555,800, plus 45% of excess over $1,500,000

>$2,000,000 < $2,500,000

$780,800, plus 49% of excess over $2,000,000

>$2,500,000 < $3,000,000

$1,025,800, plus 53% of excess over $2.5 MM


$1,290,800, plus 55% of excess over $3MM

How will the tax be paid?
There are only five ways to pay estate tax, which again, is due within nine months from date of death.

  1. Build and maintain a sinking fund.
  2. Borrow. A mere delay in the out of pocket expense because a loan must be repaid, with interest. If the loan is taken against collateralized property, problems of valuation in a buyers' market may further reduce the values realized.
  3. Sell or liquidate assets. All markets, commercial real estate, residential real estate, and of course securities, experience buyers' and sellers' markets. Which will you die during? If real estate is mortgaged, then more than one property may need liquidating to find the right amount of equity to give to the IRS estate tax collector. Multiple real estate transactions mean multiple charges to the estate for fees and expenses. Of course, all the future growth and income from such assets is lost.
  4. Life insurance. You set up an irrevocable insurance trust and qualify for coverage with regard to satisfactory health. The irrevocable trust buys and owns an insurance policy on your life. It pays a premium(s). You die. The life insurance company pays to the irrevocable trust a cash death benefit. Your irrevocable trust, trustee, exchanges the death benefit cash in the irrevocable trust for assets in your estate. Your estate uses the cash to pay the tax. Your trustee manages the trust assets(purchased from your, cars, stocks, etc.) for the benefit of the irrevocable trust beneficiaries. Typically, beneficiaries are your loved ones. The trustee often is a family member, too.

    A common life insurance policy used for paying estate taxes for married couples is survivorship life, also known as second-to-die insurance. It insures two lives. It pays its death benefit only after the second death. Its premiums are less than premiums on like coverage for a single-life policy.

  5. A combination of 1-4.

If applicable, which would you prefer? Send what might be a substantial and significant portion of your estate, perhaps even a business you built with blood, sweat, and tears, to the IRS Estate Tax Collector to benefit a couple hundred million plus strangers, or send a much less significant amount of premium(s) to an insurance company to preserve the integrity of your estate for family, friends, and charities?

Once the economy of scale of the life insurance method is understood, the life insurance premium rarely is seen as the problem. It's seen as the solution to the problem.

Please allow one of our qualified life insurance specialists to assist you in obtaining the information you want so you can make an informed decision.

With one free phone call or an e-mail you can take the first step toward seeing if using life insurance is a good way for you to insure that your estate goes to those you desire.

Using modern technology and traditional service we provide you with all the information you need to make the right decision for you.

Call us Toll Free at 800-930-6162 or e-mail us at

Or, to learn more about how life insurance can provide complete financial security for your family, protect your business, pay off your mortgage, or even pay your estate taxes, please visit Family Protection, Business Ins., Mortgage Ins. or Estate Plans. Or, if you want some basic information on estate planning for estates below the estate tax level, click on basic estate planning.



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